The Impact of Insurance on Economic Growth

By Rose Mlay

Insurance is a contractual agreement where the insurer agrees to compensate the loss or damage sustained to the insured party. The insurers receive premium and the insured  receives compensation of loss based on the sum assured. Insurance as a tool for economic growth is handy at managing risks in a cost-effective manner. It does so by managing a pool of funds which is invested within the economy to create ability to compensate the claims that arise.

Insurances as a risk mitigating tool covers a lot of risk aspects such as motor, property, medical, life aspects such as education. These insurance types have great importance in social life because they sustains living standard of people. In addition, insurance helps to provide financial stability in lending organisations. For these reasons we can say that, insurance is shock absorb of the economy.

The key role of insurance in economic growth is based on two fundamental aspects. First, is investment made by insurance companies. Insurance companies collect premium in advance of any claim so insurers can pool the premiums into mid and long-term investment. 

Second, insurance influences the interest rates. It provides pool of funds consequently creating a supply of money. In addition, insurance cover reduces risk to financial lenders consequently reducing the interest rate. For instance, consumers and organizations often need to apply for a loan to make a significant purchase or start or expand a business. Before a lending institution will finance a home or a car, or provide backing to entrepreneurs, consumers or organisation, proof of insurance is often required to cover any potential damage (e.g., fire) and assure that loans will be repaid. Lenders can offer a lower interest rate than they could if no insurance were available.

Thus, insurance is an integral part of the economy, performing a variety of important functions. Not only do insurers provide financial security and peace of mind to households and businesses, but they are a vital source of long-term capital, providing stability to financial markets and the overall economy. Without the guarantee of insurance most businesses could not operate as they do today.